Hexaware is a global technology company focused on delivering automation and cloud solutions to their clients. AUTOMATE EVERYTHING™, CLOUDIFY EVERYTHING™ and TRANSFORM CUSTOMER EXPERIENCES™ is their three-pronged strategy to fast-track enterprises into the digital era.
The company has a global presence across 20+ countries with 36+ offices and a workforce of 20,000 employees.
The company’s shares have 52 weeks price band of INR 399-202 and a total market capitalization of INR 106 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 16 and a dividend yield of 2.54%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars.
From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
1.Economic Moat (★ ★ ☆ ☆ ☆)
The company operates in the IT and technology industry where market dominance is achieved through scale, clientele, technical know-how, digital infrastructure and workforce.
Hexaware Technologies is a medium-size company in the grand Indian IT landscape. However, the company has managed to show high growth because of the agility and platform services which they offer. Hexaware has a presence in 20+ countries and a high onshore mix in its workforce.
The company has a good digital infrastructure but a comparatively smaller scale and hence it does not have significant pricing power with the customers like the other large IT companies.
As a result of this, the gross margin is also declining over the years for the company. Overall this indicates that the company does not have any wide economic moat in the industry. Therefore this category gets 2 stars Hexaware Technologies fundamental analysis.
2. Business Model and Management (★ ★ ★ ☆ ☆)
The business model of the company is such that it operates mostly in Information technology (IT), Business Process Outsourcing (BPO) and Consulting Services.
The company has developed a new, patent-pending platform for automated re-platforming of applications to the cloud. The platform is called AMAZE and has got a very strong early traction with three F500 customers from pre-launch. The client distribution of revenue is also such that Top 5 clients contribute around 37.4% and Top 10 contributes 47.5%. The company also has new deal wins worth $ 46 million in the last quarter.
Mr R Srikrishna is the CEO and Executive Director of the company and has over 25 years of IT experience.
He led the Hexaware’s ‘Shrink IT Grow Digital’ strategy. Mr Ram Singampalli is the Chief Operating Officer of the company, and has close to three decades of IT industry experience and held several leadership roles across the industry. Overall the management has been stable and was able to give good growth to the business.
The Employee utilization metrics for the company stands at 79.8% and the attrition has reduced to an all-time low of 14%. The geographical revenue breakup is such that, around 73% comes from North America, 17.4% comes from Europe and 7.3% comes from the APAC region. Overall this indicates a moderately diversified business model across geographies and product offerings. Therefore this category gets 2 stars Hexaware Technologies fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ★)
The revenue has shown a growth of 18.12% CAGR over the last 10 years. The operating income and net income has also grown at 13.88% and 17.74% CAGR respectively. This also shows improvement in profitability for the company.
The working capital is also positive and has shown a linear growth. Capital expenditure has remained flat even with an increased scale.
Therefore this category gets 5 stars Hexaware Technologies fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ☆)
The gross margin has been declining over the years even with stable wage inflation. This indicates that the company has increased its cost of services delivered and is not able to pass it down to customers.
The other margins along with return on assets have been stable. However, the margins can decline due to the Covid-19 effects on global businesses.
Therefore this category gets 4 stars Hexaware Technologies fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ★)
The net income margin has seen a slight increase over the years and with the Cap-Ex as a percentage of sales has declined. This also shows that growth is driven majorly by inorganic means through partnerships and acquisitions.
The free cash flow as a percentage of net income has been positive over the years. The free and operating cash flow growth has been fluctuating but this is the nature of the business. Overall the company has shown a solid cash flow position.
Therefore this category gets 5 stars in Hexaware Technologies fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)
The company does not have any debt in its capital structure therefore the financial leverage and debt to equity ratio has been flat over the years. The profitability margins have also been stable over the years hence there is no significant concern to the solvency of the company. The current and quick ratio has increased over the years and is way above the minimum threshold which shows a good liquidity position. Therefore this category gets 5 stars in Hexaware Technologies fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has not improved significantly over the years and this is because of the nature of the business. The payables period has declined from 106 to 19 days and the receivables days have almost remained stable due to the nature of contracts. The cash conversion cycle has seen a steady increase from -45 days to 42 days and it remains positive. Therefore this category gets 3 stars in Hexaware Technologies fundamental analysis.
8. Valuation Ratios (★ ★ ★ ☆ ☆)
The company traded at a stable valuation since 2010 even with improving growth prospects and profitability. Hexaware has managed to sustain the multiples over the years due to prudent cash generation and deployment along with expansion into new verticals. However, the growth is mostly inorganic in nature and hence market may not value the shares at any significantly higher multiples. Therefore this category gets 3 stars in Hexaware Technologies fundamental analysis.
9. ROE Du Pont Analysis (★ ★ ★ ★ ★)
The leverage ratio has been stable and the asset turnover has improved steadily over the years. The interest burden ratio has remained at 100% due to no interest-bearing debt in the capital structure of the company. The operating margin has seen a slight decline and the tax efficiency has remained stable. Overall the Return on Equity has been stable for the company even with increased equity base. Therefore this category gets 5 stars in Hexaware Technologies fundamental analysis.
10. Future Prospects (★ ★ ☆ ☆ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The stock price of the company has rallied 48% after the promoters announced their intention to delist the stock from Indian markets at an indicative offer price of INR 285. The company has received a good deal wins in the recent quarters and have plans for improving profitability. The stock can delist next year if the shareholders approve the promoter’s decision.
- If the company plans to delists then share prices are exposed to high risks including higher-than-expected IT demand, INR depreciation vs. USD, stronger market demand for automation and cloud solutions and potential M&A/ de-listing at a higher price. Hence any comment cannot be made at this point in time. The promoters can go back on their decision.
- Hexaware has a sluggish growth outlook for July-December 2020 and could witness pricing pressure or vendor consolidation ahead. The company also has one of the lowest EBITDA margins of around 15.5% as compared to the other mid-cap industry average of 18.5-19.0%.
The company may get delisted in the near future or the promoters can go back on their plans to take the company private.
Hence any comment cannot be made on the nature of investment for the near future of this company. Therefore this category gets 2 stars in Hexaware Technologies fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
HEXAWARE TECHNOLOGIES SHARES (3.7/5)
|Hexaware Technologies Share|
|Economic Moat||★ ★ ☆ ☆ ☆|
|Business & Management||★ ★ ★ ☆ ☆|
|Growth Ratios||★ ★ ★ ★ ★|
|Profitability Ratios||★ ★ ★ ★ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ★|
|Liquidity & Solvency||★ ★ ★ ★ ★|
|Efficiency Ratios||★ ★ ★ ☆ ☆|
|Valuation Ratios||★ ★ ★ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ★|
|Future Prospects||★ ★ ☆ ☆ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|